5    Additional information

5.1.1 Breakdown of tax expense

In the income statement, expense for 2015 and 2014 breaks down as follows:

Current income taxes are calculated using the actual tax rates in force.

This position comprises income taxes and property gains taxes:

In the Projects & Development division, expenses for property gains taxes are contingent on the time of sale of development real estate; in the Real Estate division, they are contingent on sales from the portfolio. These property taxes are incurred on a cyclical basis accordingly.

As at 31 December, the following receivables and liabilities are due from or owed to municipal and cantonal tax authorities:

On the basis of a ruling handed down by the Swiss Federal Supreme Court on 24 August 2015 concerning the Swiss tax liability of the since liquidated business establishment of Allreal Finanz AG in the Cayman Islands, said liability was definitively assessed and the income and capital taxes due up to the 2012 tax period were paid in the period under review. CHF 3.4 million of the provisions set aside in previous years to meet the tax liabilities in this matter were not drawn on. This amount was credited to the income statement.

The deferred taxes on revaluation break down as follows:

The upward valuation of CHF 15.8 million on the investment real estate led to a net charge of CHF 3.6 million to deferred taxes in the income statement, CHF 3.4 million of which was attributable to investment real estate under construction and CHF 0.2 million to yield-producing properties.

During the period under review, the temporary valuation differences between the tax-relevant individual financial statements of the Group companies and the consolidated financial statements increased, such that deferred tax income of CHF 19.6 million was charged to the income statement (2014: CHF 5.3 million).

In addition, tax effects amounting to CHF 9.4 million arising from loss carry-forwards and valued at the consolidated tax rate of 22% were charged to the income statement. With the sale of three investment properties, deferred tax assets amounting to CHF 1.4 million were written back.

The deferred tax liabilities from the provision for deferred taxes reported under long-term liabilities break down as follows:

The deferred tax liabilities in connection with the higher valuation of investment real estate (difference between market and acquisition value) are generally based on an average holding period of 13 years from date of purchase, or year of construction in the case of new properties, and a tax rate of up to 31% (2014: 30%). Deferred taxes are calculated separately for each investment property.

Temporary valuation differences on investment real estate (difference between acquisition value and taxable book value) and other balance sheet positions record the differences between the individual financial statements of the Allreal Group companies and the consolidated financial statements. These mainly involve write-downs on investment and development real estate, additional value adjustments on receivables and the recognition of additional provisions deducted from the current tax assessment.

Valuation differences on write-downs on investment real estate in the canton of Zurich and on other balance sheet positions are calculated at a consolidated tax rate of 22% (2014: 22%). A tax rate of 15% (2014: 15%) was applied to valuation differences on write-downs on investment real estate outside the canton of Zurich.

In 2015, with the amortisation of the bonds, deferred taxes totalling CHF 0.3 million were credited to the income statement (2014: CHF 0.8 million).

Deferred tax assets comprise the following positions:

Under IAS 12, deferred tax assets from tax loss carry-forwards or from negative market value adjustments can only be capitalised if they can be allocated both in terms of substance and timing. With regard to the lower valuation of investment real estate, it is possible to offset losses on the sale of real estate against other current gains. A tax rate of 22% (2014: 22%) was applied to properties in the canton of Zurich and a tax rate of 15% was applied to properties in the other cantons (2014: 15%).

Deferred tax assets on negative replacement values of interest rate swaps increased by CHF 0.8 million year-on-year to CHF 15.9 million, CHF –0.3 million of which was taken directly to equity and CHF 1.1 million to income.

As at 31 December 2015, capitalised deferred taxes existed on tax loss carry-forwards of CHF 25.1 million (31.12.2014: CHF 2.8 million) relating to Group companies domiciled in Zurich which reported cumulative losses in the individual financial statements, which losses are likely to be offset against gains in the following years (expiry of first tax loss carry-forward as of 2016). A tax rate of 22% was applied (2014: 22%).

The recognition of pension commitments results in deferred tax assets amounting to CHF 0.9 million as at the balance sheet cut-off date (31.12.2014: CHF 3.1 million), representing a year-on-year decrease of CHF 2.2 million, CHF –2.5 million of which was taken directly to equity and CHF 0.3 million to income.

The following table shows the reconciliation between the theoretical tax rates applicable to the Group and the effective taxes.

The reference tax rate used is the sum total of the national, cantonal and municipal income tax rates which are applied on average.

The adjustment of tax effects on revaluations reflects the change in the upward and downward valuations of investment properties and their cumulative balance, encumbered with up to 31% deferred taxes and as the difference versus the reference tax rate of 22%.

The credit of CHF 3.2 million for current taxes of previous year’s results from the recalculation of the tax status of each Group company on the basis of tax returns submitted or definitive tax assessments received.

Income subject to a lower tax rate factors in that a number of the Group companies are domiciled at locations where the total tax burden is significantly lower than the consolidated tax rate of 22%.

Income subject to a higher tax rate factors in that gains on real estate subject to property gains tax are taxed at total tax rates of up to 31% and are therefore above the consolidated tax rate of 22%. In particular, this relates to gains taxed in connection with the invoicing of completed projects in the Projects & Development division or from the sale of investment properties in the Real Estate division.

The capital commitments relate to contractual agreements for the acquisition of development real estate. Whether the commitment is invoked depends on the fulfilment of the conditions agreed with the counterparties.

As in the previous year, there are no guarantees or sureties in favour of third parties. Beyond this, in the individual financial statement, Allreal Holding AG has issued guarantees and sureties amounting to an additional CHF 539.6 million in connection with financings and derivative financial transactions with third parties on behalf of individual subsidiaries (2014: CHF 659.6 million).

As at 31 December 2015, there are no pending legal disputes of a nature liable to have a significant impact on the asset and income situation of the Allreal Group for which no corresponding provisions are in place.

5.4.1 Management of finance and capital

In the context of the financing strategy, in the investment and financing guidelines last amended on 1 October 2013, the Board of Directors issued rules on the extent to which the Allreal Group can take out external debt. The share of consolidated equity must be over 35% on the balance sheet cut-off date, net gearing must not exceed 150%, the interest coverage ratio must not fall below 2.0 and the investment and development real estate balance sheet positions may only be refinanced with a maximum of 70% interest-bearing borrowings.

The Board of Directors reviews the capital structure on a quarterly basis and monitors in particular compliance with the limits set out in the investment and financing guidelines. Capital management encompasses both equity capital and interest-bearing borrowings (financial debt).

The contractual terms agreed with lenders regarding minimum capitalisation (financial covenants) are identical to those laid down by the internal investment and financing guidelines. During the period under review, they were complied with without exception and are as follows as at the balance sheet cut-off date:

Equity ratio

(equity as a percentage of total assets)

Net gearing

(net financial debt as a percentage of consolidated equity)

Interest coverage ratio

(EBITDA excl. revaluation gains divided by net financial expense)

Refinancing of properties

(Borrowings in percent of the book value of investment and development real estate in percent)

If the financial covenants are not complied with, the lenders are contractually entitled to raise the margins for financing, introduce amortisation obligations or demand full repayment of loans.

The Allreal Group is exposed to various financial risks stemming from the market, changes in interest rates, receivables, refinancing and liquidity. Risk management is conducted in compliance with the investment and financing guidelines approved by the Board of Directors. The operational implementation of the guidelines is undertaken directly by the Chief Financial Officer, who submits reports to Group Management on the most important financial risks at least once a month. The Board of Directors is informed of the development of financial risks in writing every three months by Group Management.

In relation to financial instruments, Allreal is mainly exposed to market risk resulting from changes in interest rates. The relevant sensitivity analysis in this connection is set out under 5.4.4.

Fluctuations in the market interest rate give rise to an interest rate risk for the Allreal Group as, in some cases, the Group companies take out fixed advances with mortgage collateral or mortgage loans on a short-term basis up to a maximum of 12 months. Advances are taken out with banks and are denominated exclusively in Swiss francs. This risk is countered with the use of derivative financial instruments in the form of interest rate swaps, the aim being firstly to extend the average duration of the interest lock-in periods of all financial liabilities and secondly to fix the average interest rate on this debt. This reduces the interest rate risk. At the same time, so-called payer swaps are concluded which involve Allreal entering into a contract as a fixed payer over a certain term. In return, the counterparty pays the variable CHF Libor rate on a 1-, 3- or 6-month basis. If, however, the CHF Libor rate is negative, the interest expense will increase since Allreal is also obliged to make variable interest payments. The interest payments are settled with the counterparty net on a monthly, quarterly or half-yearly basis. The variable interest payments from the payer swaps can be shortened further, by reducing the variable 3- or 6-month interest rate with the aid of base swaps on a 1-month basis. These base swaps exchange short-term interest payments and have the same maturity as the overlying payer swaps. They enable Allreal to achieve a risk-free reduction in its interest burden without increasing the contract volume.

The maturity structure is reviewed by the Board of Directors and Group Management at least quarterly and the risks are analysed by means of simplified liability management. The aim is to achieve an even distribution of the interest rate renewal dates with a remaining term of more than four years.

As at 31 December 2015, interest rate swaps (payer swaps) totalling CHF 735.0 million are in place (31.12.2014: CHF 885.0 million).

In the 2015 financial year, no new interest rate swaps were concluded and interest rate swaps totalling CHF 150.0 million expired.

To reduce financial expense, in the preceding years a base swap with a contract value of CHF 50.0 million was concluded on payment flows already hedged by payer swaps. The base swap has a final maturity of February 2017.

The negative replacement values were recognised as long-term liabilities (CHF 71.8 million).

Valuation of interest rate swaps

As at the balance sheet date, the following values in connection with the outstanding interest rate swaps apply, broken down by contract maturity:

The changes in the value of the interest rate swaps which fulfil the requirements for hedge accounting are reported as part of retained earnings in equity. The interest rate swaps have an impact on the consolidated statement of comprehensive income in each reporting period in which interest payments are exchanged with the counterparty. The timing of these coincides with the maturities of the short-term fixed advances on a mortgage basis. The ineffective portion of the market value adjustment of CHF 5.1 million was recognised in income.

A sensitivity analysis was performed, taking account of the contract volume of the derivative financial instruments and borrowings, cash and financial assets as at the balance sheet cut-off date. It was assumed that the balance sheet positions were in place on this scale for a whole year and that the general interest rate level changes by one percentage point. This approach is consistent with the calculations used in internal financial reporting to the Board of Directors and Group Management.

If the general level of interest rates were 100 basis points higher or lower than on the balance sheet cut-off date and if all other variables were to remain constant, net profit would be CHF 1.4 million higher or CHF 5.7 million lower (2014: CHF 2.1 million/CHF 8.3 million), and equity would increase by CHF 29.8 million or decrease by CHF 36.0 million (31.12.2014: CHF 58.2 million/CHF 56.5 million). In the case of a lower level of interest rates, these calculations are based in particular on the assumption that negative CHF Libor rates will lead to higher payments on interest rate swaps.

The credit risk to which Allreal is exposed is that a counterparty might be unable to meet its financial obligations owing to default, resulting in losses for the Group. Customers’ payment arrears and credit standing are continuously monitored in both the Projects & Development division and the Real Estate division. Monthly reports with comments on the largest positions are submitted to Group Management.

Trade receivables and other receivables consist of a large number of balances owed by counterparties in the Projects & Development division and owed by tenants and property management companies in the Real Estate division. Receivables from tenancies are typically secured via separate bank guarantees or tenant deposits. There are no concentrations of risk in which a single debtor accounts for more than 20% of total trade receivables. Payments on account are periodically requested for current construction projects. Allreal’s close monitoring of receivables explains its low historical default rate.

The credit risk relating to cash and derivative financial instruments is considered small as the counterparties consist solely of banks and insurance companies with good credit ratings (minimum BBB+ rating). Allreal endeavours to work with a large number of banks which mainly operate in Switzerland. At CHF 15.0 million, the maximum default risk relating to cash is lower than the book value of CHF 23.4 million, since with a number of lending banks waiver of the right to offset credit balance against liabilities was contractually excluded.

The maximum default risk relating to receivables and other claims corresponds to the book value. The guarantees and sureties issued in favour of banks in connection with financing transactions and derivative financial instruments are not likely to give rise to any additional charges greater than the recognised borrowings from banks and insurance companies amounting to CHF 1132.8 million.

As at the balance sheet cut-off date, the credit risk relating to financial assets amounts to CHF 143.4 million, which corresponds to the balance sheet item.

As at the balance sheet cut-off date, unutilised immediately callable credit limits granted by banks are in place in an amount of CHF 554 million. The binding financial ratios agreed with banks in the credit agreements are the same as those laid down in the investment and financing guidelines; during the period under review they were complied with at all times. Three-year medium-term planning is in place for the Allreal Group which ensures that the thresholds are complied with on a rolling basis through early extension of maturing loans. Under the financial covenants, Allreal has the option of taking out around CHF 1.2 billion in new borrowings before new equity is required.

The following breakdown shows the non-discounted payment outflows of existing liabilities, including derivative financial instruments (payer swaps), as at the balance sheet cut-off date. In accordance with contractual agreements, the earliest possible repayments are entered as the maturity dates. Since the interest rate swaps involve fixing the variable payment flows on a monthly, quarterly or half-yearly basis and as this is in the future, the CHF Libor rates on 31 December were used as the reference interest rates on a 1 to 6-month basis.

Interest and nominal amount payments on liabilities

Financial assets and borrowings are recognised using the amortised cost method.

Derivative financial instruments (interest rate swaps) are stated at market value as at the balance sheet cut-off date, by estimating and discounting future payment flows at current interest rates on 31 December. Because the contracts are standardised, it is possible to value them on the basis of current interest rates. Allreal has the interest rate swaps calculated by third parties.

All financial instruments carried at fair value are broken down into categories.

Allocation to the individual categories is dependent on the database for calculating the fair values.

Category 1: Fair value using prices quoted on an active market (stock exchange)
Category 2: Fair value using a valuation method whose input factors are derived from an active market
Category 3: Fair value using a valuation method whose input factors are not observable on an active market

In 2015 and 2014, there were no reclassifications within the categories.

With the exception of the borrowings shown below, it can be assumed that the book values of the financial assets and the other financial liabilities correspond to fair values.

The fair values of the bond issues correspond to the market price as at the balance sheet cut-off date. The fair values of the fixed-rate mortgages are determined using the CHF interest rates current as at 31 December for the respective terms plus a credit margin of 0.8% (2014: 0.8%).

The following table shows the book and market values (fair values) of all financial instruments recognised on the balance sheet.

Related parties consist of those shareholders who have formed a group under the shareholders’ pooling agreement with a view to complying with the “Lex Koller” requirements and as at the balance sheet cut-off date hold 40.15% of the share capital of Allreal Holding AG, the Board of Directors, Group Management and the Allreal pension fund.

The six members of the Board of Directors received fixed remunerations totalling CHF 0.70 million (2014: CHF 0.47 million), which is paid out after the annual accounts have been approved by the annual general meeting. These persons do not receive any other remuneration.

The remuneration of the Board of Directors is paid directly by Allreal Holding AG. The members of Group Management are employees of Allreal Generalunternehmung AG – a wholly owned subsidiary of Allreal Holding AG – which pays the remuneration of these persons. All amounts represent gross payments before the social insurance contributions paid by the remuneration recipients. The employer’s share of the social insurance contributions is not included.

In the period under review, remuneration totalling CHF 3.74 million (2014: CHF 4.38 million) paid to Group Management was recognised in the consolidated financial statements, out of which the highest total remuneration of CHF 0.96 million (2014: CHF 1.29 million) was paid to Roger Herzog.

Variable bonuses will be paid out in cash after the annual accounts and the compensation report have been approved by the Board of Directors.

[1]Calculated at the market value on date of allocation

In summary, the following remunerations paid to the Board of Directors and Group Management were recognised in the consolidated financial statements:

In the period under review and in the previous year, no loans, credits or sureties were granted to members of the Board of Directors and Group Management or parties related to them, nor to former members of these bodies.

On 13 April 2015, one member of Group Management sold 212 registered shares of Allreal Holding AG directly to the company at the current market price of CHF 142.50 (transaction value: CHF 0.03 million).

As at 31 December 2015, the following members of the Board of Directors and Group Management were directly or indirectly invested in Allreal Holding AG:

The shareholding of the Helvetia Group, St. Gallen, in which Dr. Ralph-Thomas Honegger performs the function of Chief Investment Officer (CIO) and is a member of management, is not included in the table.

The shares held by the members of the Board of Directors and Group Management correspond to 1.84% of the share capital of the company (31.12.2014: 1.83%).

During the year under review, the Projects & Development division carried out construction projects for a total of CHF 25.0 million (2014: CHF 28.5 million) for several parties to the shareholders’ pooling agreement under standard market conditions, which corresponds to 4.1% of income from realisation Projects & Development (2014: 5.2%).

The Helvetia Group, which holds 10.0% of Allreal Holding AG’s share capital, is represented on the Board of Directors of Allreal Holding AG by Dr. Ralph-Thomas Honegger. Insurance contracts (policies covering buildings, construction and personnel) are in place between the Helvetia Group and individual Allreal companies with an annual premium volume of CHF 1.1 million (2014: CHF 1.1 million). As at the balance sheet cut-off date, a receivable in the amount of CHF 0.7 million (not yet due) was outstanding from the Helvetia Group for the completion of projects by the Projects & Development division.

A buildings insurance policy with an annual premium volume of CHF 0.13 million (2014: CHF 0.12 million) is held with the Swiss Mobiliar Group, which is a member of the shareholders’ pooling agreement through a subsidiary.
Allreal was granted fixed mortgages amounting to CHF 52.5 million (CHF 37.5 million at 1.55% and CHF 15.0 million at 1.90%) with terms running until 2022.

Privatbank IHAG Zurich AG, which belongs to the group of companies of the core shareholder IHAG Holding AG, has granted Allreal loans secured by mortgage totalling CHF 30.0 million (interest rate of 0.50% with a term until April 2016). The bank has also been entrusted with the task of market making for the company (fees of CHF 0.08 million).

The Allreal Group obtains consultancy services in legal matters from several law firms, including Meyerlustenberger Lachenal Attorneys at Law, in which Dr. Thomas Lustenberger, Chairman of the Board of Directors of Allreal Holding AG, is one of several counsels. Decisions to assign mandates to external lawyers are taken by Group Management without consulting the Board of Directors.

In the 2015 financial year, Meyerlustenberger Lachenal billed the Allreal Group fees amounting to CHF 0.061 million (2014: CHF 0.057 million).

For several years, Allreal has had a business relationship with Banque Cantonale Vaudoise, where Olivier Steimer, member of the Board of Directors of Allreal Holding AG, holds the office of Chairman of the Board of Directors. As at the balance sheet cut-off date, loans secured by mortgage are in place amounting to CHF 50.0 million (interest rate of 0.6% with terms until February 2015), along with derivative financial instruments (payer swaps) with a par value of CHF 150.0 million.

The Allreal pension fund holds Allreal registered shares with a value of CHF 1.5 million (2014: CHF 1.6 million). As at the balance sheet date, there are no receivables or liabilities between the Allreal pension fund and the Allreal companies. During the period under review, Allreal’s employer’s contributions amounted to CHF 2.8 million (2014: CHF 3.0 million).

Taking the above-mentioned into account, as at the balance sheet date, there are no significant outstanding receivables or liabilities between any related parties, and no other transactions with related parties took place in 2015.

The transactions between the individual Group companies are carried out at arm’s length. This also applies in particular to building services provided to the Real Estate division by the Projects & Development division.

In addition, the Projects & Development division performs management services for the other parts of the company. In 2015, it received CHF 4.8 million (2014: CHF 4.5 million) from the Real Estate division as well as CHF 0.6 million (2014: CHF 0.6 million) for such services. These sums were eliminated in the consolidated financial statements.

Between 31 December 2015 and 16 February 2016 (date on which the consolidated financial statements were approved by the Board of Directors) no further events took place which would result in any adjustments to the book values of the assets and liabilities or which would need to be disclosed here.